Q+A: How will Ireland's bailout work?
(Reuters) - Ireland requested an international bailout on Sunday to tackle its banking and budget crisis. Following are some details of how it will work.
WHAT IS AVAILABLE?
The European Union safety net consists of the European Financial Stability Mechanism (EFSM), which can lend up to 60 billion euros, and the European Financial Stability Facility (EFSF), which is backed by 440 billion euros worth of euro zone government guarantees. EU finance ministers said in a statement that Ireland would receive aid from both facilities.
The head of the International Monetary Fund said on Sunday the IMF was also ready to help Ireland with a multi-year loan. The IMF has indicated previously that it would be ready to provide up to 50 percent of what Europe was providing.
Ireland could also benefit from bilateral contributions. The ministers said Britain and Sweden, which are not in the euro zone, had indicated on Sunday they were ready to consider offering bilateral loans.
WHO LENDS FIRST?
Money from the EFSM would be paid out first, but EFSF cash and IMF involvement help the EU avoid a situation where one country uses up all the funds available under the EFSM.
The EFSM is available to all 27 EU members while the EFSF will lend only to the 16 countries of the euro zone.
HOW LONG WILL IT TAKE?
The mechanism has never been used before, but EU officials have estimated it would take three to five weeks from the application for assistance and the first disbursement of money.
The bailout will build on a four-year fiscal plan which the Irish government is about to unveil. Dublin was also planning to return to bond markets in January so having a bailout in place before the end of the year would remove that deadline.
HOW DOES IT START?
The first steps have already been taken but others will follow under the procedures below.
1. The first step involves a request for help to the European Commission and a draft reform program being sent to the Commission and to the Economic and Financial Committee (EFC) of junior finance ministers and central bankers.
2. The European Commission, in liaison with the European Central Bank, assesses the request and recommends to EU finance ministers to accept or reject it.
3. EU ministers vote on the Commission proposal with a qualified majority.
4. If they say 'yes', the ministers also say how much money Ireland will get, in what tranches, and when, and set conditions for the help. The conditions are drawn up by the Commission in consultation with the European Central Bank.
5. Ireland and the Commission sign a memorandum of understanding containing the conditions for help.
6. The Commission raises the money on the market by issuing bonds, using the EU budget as collateral. The EU executive pays out the tranches to Ireland.
7. Seeking funds from the IMF, apart from the EU help, involves first telling the Commission about it. The Commission determines what financing options are still available under EU schemes and informs the EFC as well.
8. The aid money is paid out in installments after regular checks by the Commission that Ireland is on track with its reform program.
CONDITIONS
The EU/IMF will seek strict conditions on its loans and may require Dublin to consider tax increases and spending cuts previously thought unpalatable.
Ireland is currently aiming for fiscal adjustments totaling 15 billion euros between now and 2014, a doubling of its previous target. Under a bailout scenario, the adjustments may be even harsher.
The EU could tell Dublin to renege on an agreement with public sector unions not to cut jobs or push through further wage cuts. Brussels could also demand Ireland raises its corporation tax rate, viewed as sacrosanct by Dublin, from its low level of 12.5 percent.
Greece had to raise its rate of Value Added Tax (VAT) to 23 percent from 19 percent as part of its bailout package and Ireland may have to increase its VAT level from 21 percent currently.
WHAT WILL THE COST BE FOR IRELAND?
The blueprint for EU support - although not binding - is the financial aid package to Greece where, for variable-rate loans, the basis is three-month Euribor, while fixed rate loans are based upon the rates corresponding to swap rates for the relevant maturities.
In addition there is a charge of 300 basis points for maturities up to three years and an extra 100 basis points per year for loans longer than three years. A onetime service fee of 50 basis points is charged to cover operational costs.
The cost of borrowing is roughly around five percent.
While there are no limits on the maturities of the loans to the country in need, the Greek case has set a precedent of 3-5 year loans.
HOW MUCH DOES IRELAND NEED?
A senior EU source said on Sunday Ireland was likely to receive 80 to 90 billion euros in the planned financial support program, including money to support the Irish banking sector.
Greece's rescue package was 110 billion euros.
Any bailout needs to be big enough to end uncertainty over whether future Irish bank loan losses could rattle the sovereign and destabilize the euro zone.
Ireland has pegged its worst-case scenario for its banks' bailout at 50 billion euros but investors do not believe the government's assessment after previous forecasts were raised.
A bailout for the banks would not necessarily have to equal or exceed 50 billion euros because Ireland has already pledged 33 billion euros for its banking sector but it would probably have to be considerably more than 17 billion euros to reflect investor concerns about losses breaching the latest worst-case scenario.
Ireland's banks are dependent on ECB support -- 130 billion euros in funding at the end of October -- and presumably this support would continue until markets had calmed down enough for lenders to start accessing wholesale funding markets again.
CAN IRELAND USE THE MONEY TO SUPPORT ITS BANKS?
Yes. While the EU funds cannot be accessed by Irish banks directly, the Irish government can borrow from the EFSM or EFSF and use the cash to support its banking sector. The EU finance ministers said on Sunday the program would include a fund for potential future capital needs of the banking sector.